Asian Stocks Surge Amid Central Bank Rate Cuts

China's Repo Rate Cut Boosts Blue Chips

Asia-Pacific Shares Rebound, BOJ Holds Tight on Policy

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• Asian stocks are on the rise, following expectations of further rate cuts by central banks.
• The European and U.S. markets also showed positive signs, with the S&P 500 futures firming 0.3%.
• The coming week is crucial with surveys on global manufacturing, U.S. consumer confidence, and durable goods.
• The rate cuts are being implemented to avoid a deterioration in labor market conditions and achieve a soft landing for the economy.

Asian stocks have shown a firming trend on Monday, a significant development that has sent ripples across the global financial markets. This comes in the wake of expectations of further rate cuts by central banks and key U.S. inflation figures that are likely to give a green signal for more easing in the U.S. 

China's central bank has taken the lead in this regard, surprising many by lowering its 14-day repo rate by 10 basis points. This move came a few days after the markets were left disappointed when the bank did not cut longer-term rates. The decision has had a positive impact on Chinese blue chips, which saw a rise of 0.5%.

The trading scenario in Asia was relatively thin due to a holiday in Japan. Despite this, MSCI's broadest index of Asia-Pacific shares outside Japan added 0.2%, bouncing back 2.7% last week. Tokyo's Nikkei was shut, but futures were trading at 38,530 compared to a cash close of 37,723. The index had rallied 3.1% last week as the yen eased from its highs and the Bank of Japan (BOJ) signaled it was in no rush to tighten policy further.

Global Market Response and Future Predictions

The European market also showed positive signs with EUROSTOXX 50 futures adding 0.3% and FTSE futures 0.1%. The U.S. market was not far behind with S&P 500 futures firming 0.3% and Nasdaq futures adding 0.5%. The S&P is up 1% so far in September, historically the weakest month for stocks, and has gained 19% year-to-date to reach all-time highs.

The U.S. market witnessed a flurry of activity on Friday with more than 20 billion shares changing hands on U.S. exchanges, marking the busiest session since January 2021. Analysts at BofA noted that the S&P rises an average of 21% when there is no recession in the 12-months after the start of Fed cuts. The markets are still basking in the afterglow of the Federal Reserve's half-point rate cut, with futures implying a 50% probability it will deliver another outsized move in November.

Barclays economist Christian Keller highlighted the significance of this move, stating, While the move was well flagged, its importance is hard to overstate, given the Fed's role in USD liquidity conditions worldwide. Keller further added, We note that initiating a cycle with a 50bp move without an imminent financial crisis or jobs actually being lost is quite unusual for the Fed. We thus think the step reveals the Fed's determination to avoid a deterioration in labor market conditions, or, in market jargon: to achieve a soft landing.

Upcoming Central Bank Meetings and Market Expectations

The coming week is crucial as it includes surveys on global manufacturing, U.S. consumer confidence, and durable goods. The Swiss National Bank meets on Thursday and markets are fully priced for a quarter-point cut to 1.0%, with a 41% chance it will ease by 50 basis points. Sweden's central bank meets on Wednesday and is also expected to ease by 25 basis points, again with some chance it might go larger.

One bank not easing is the Reserve Bank of Australia (RBA) which meets on Tuesday and is considered almost certain to hold at 4.35% as inflation proves stubborn. Investors were also keeping a wary eye on negotiations to avoid a U.S. government shutdown with just days before the current $1.2 trillion in funding runs out on Sept. 30. Republican U.S. House of Representatives Speaker Mike Johnson on Sunday proposed a three-month stopgap funding bill but now it has to go to vote.

In currency markets, the dollar edged up 0.3% to 144.35 yen, having bounced 2.2% last week from a 139.58 low. The euro gained almost 3% last week to reach 161.09 yen, while holding firm on the dollar at $1.1160. Japan's LDP, which has a parliamentary majority, will elect a new leader on Sept. 27, with the winner to replace outgoing Prime Minister Fumio Kishida.

The U.S. rate cut combined with lower bond yields helped keep gold up at $2,620 an ounce, just off an all-time peak of $2,625,59. Net long positions in Comex gold futures hit their highest level in four years last week, suggesting some risk of a pullback in the near term. Oil prices firmed further, having rallied around 4% last week on hopes lower borrowing costs would support global economic growth and demand. Brent added 40 cents to $74.89 a barrel, while U.S. crude rose 39 cents to $71.39 per barrel.